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More unicorns might finally IPO in 2018

SEC rule changes and the 2012 JOBS Act could be changing the equation for tech giants eyeing public markets.

The trading floor of the New York Stock Exchange during the 2014 Zendesk IPO. (Photo by Flickr user Scott Beale / Laughing Squid, used under a Creative Commons license)
This is a guest post by Ernie Holtzheimer, an associate at the law firm Montgomery McCracken Walker & Rhoads LLP.
If the end of 2017 and beginning of 2018 represent an accurate implication of what is to come throughout the next year, we may be seeing a shift in mindset for the future goals of startup founders. And we may be able to thank (at least in part) the United States Securities and Exchange Commission.

In just a one month span between the end of 2017 and beginning of 2018, two late-stage unicorns (privately held companies that have a valuation of over $1 billion) have submitted confidential registration filings with the SEC.  As I’ve previously written about here, the SEC changed its rule regarding confidential filings to allow all companies to file early regulatory documents confidentially in July 2017. The change expanded the Jumpstart Our Businesses Act of 2012’s (JOBS Act) confidential filing provision beyond small businesses in an effort to encourage later-stage companies to file for public offerings.

By allowing early correspondence between companies and the SEC to be done in private, companies are able to undergo the initial stages of a public offering while avoiding public scrutiny by the media and competitors. The amendment has since proven to be successful, with a majority of companies opting to file draft registration and IPO statements confidentially.

One of the more recent successes occurred in late 2017 when Spotify, the world’s largest music-streaming service with over 60 million paying subscribers, filed plans for a direct listing on the New York Stock Exchange. A direct listing essentially allows private stakeholders to trade their shares on a public exchange (such as the NYSE). This option avoids costly expenses such as underwriting fees while also eliminating dilution to current equity holders and allowing executives to sell their shares immediately, rather than being subject to the typical lock-up provisions provided for in IPOs.

If larger companies continue to enter the public market, providing liquidity options for investors, we should also see an increase in access to earlier stage capital, which many companies desperately need to scale.

Notably, however, a direct listing does not necessarily raise additional capital for a company, but does provide liquidity for current equity holders. Valued at $15 billion, Spotify is the largest company to attempt a direct listing, but is not the first tech giant to attempt a unique entry into the market (See Google’s Dutch-auction IPO in 2004).

Another Silicon Valley favorite has recently followed suit, but in a more traditional manner. Last week, web-storage giant Dropbox submitted paperwork for a 2018 IPO, also taking advantage of the SEC’s confidential filing option. Dropbox is expected to list at a valuation of $10 billion, a value given to it in earlier private financing transactions, providing liquidity to investors who have waited patiently for a return on their investment (which has been for over a decade in some cases).

It is not to be said that the JOBS Act and its amendments are the only reason companies are now deciding to go public. In fact, other prominent tech unicorns will likely observe Dropbox and Spotify’s performance on the public markets as a guiding measure for their own decision to go public. Many tech giants remained on the sidelines in 2017, watching the likes of Blue Apron and Snap struggle through roller-coaster performances and failure to maintain the initial valuations in their public debuts. Nevertheless, strong performances by Dropbox and Spotify could push executives at companies such as Airbnb and Uber to finally pull the trigger on an IPO. In 2017, Airbnb reported that it will be ready to file for an IPO in 2018 (but is not certain it will actually file) and Uber CEO Dara Khosrowshahi confirmed that the company’s “target” is to go public in 2019.

Though it is not expected that every company entering public markets will be valued at over $10 billion, encouragement to shift founders’ mindsets to consider public offerings was much needed. According to Silicon Valley Bank’s 2017 startup outlook survey, which questioned 941 technology and healthcare startups, only 16 percent of companies answered that an IPO was the longterm goal for their company, while 53 percent said they expected to be acquired.

SEC Chairman Jay Clayton said when the updated rules were released, he hoped it would encourage more companies to go public. “By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital,” Clayton explained in his June 29, 2017 statement.

As Clayton put it, “[the SEC is] striving for efficiency in [its] processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy.”

Though it is uncertain what else the SEC will do to inspire private companies to go public, it is likely that we will continue to see encouragement in this regard. If larger companies continue to enter the public market, providing liquidity options for investors, we should also see an increase in access to earlier stage capital, which many companies desperately need to scale.


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